QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2019

or

☐

TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission File Number: 001-35068

ACELRX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

41-2193603

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading symbol(s)

Name of Each Exchange on Which registered:

Common Stock, $0.001 par value

ACRX

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒

As of July 24, 2019, the number of outstanding shares of the registrant’s common stock was 79,435,542.

1

ACELRX PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2019

Table of Contents

Page

PartI. Financial Information

5

Item 1.

Financial Statements

5

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 (unaudited)

6

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PartII. OTHER Information

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

63

Item 4.

Mine Safety Disclosures

63

Item 5.

Other Information

63

Item 6.

Exhibits

63

2

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Form 10-Q, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form 10-Q are contained principally under “Part I. Financial Information - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Other Information - Item 1A. Risk Factors”. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

•

our success in commercializing DSUVIA® (sufentanil sublingual tablet, 30 mcg) in the United States, including the marketing, sales, and distribution of the product;

•

our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with the DSUVIA Risk Evaluation and Mitigation Strategies, or REMS, program;

•

acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIA on payers’ formularies;

•

our ability to develop sales and marketing capabilities in a timely fashion, whether alone through recruiting qualified employees, by engaging a contract sales organization, or with potential future collaborators;

•

successfully establishing and maintaining commercial manufacturing with third parties;

•

our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatory actions or lawsuits that may be brought against us;

•

continued demonstration of an acceptable safety profile of DSUVIA;

•

effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

•

our ability to maintain regulatory approval of DZUVEO™ in the European Union or EU, and enter into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe;

•

our ability to manufacture and supply DZUVEO in Europe to any future strategic partner;

•

our ability to successfully execute the pathway towards a resubmission of the Zalviso® (sufentanil sublingual tablet system) New Drug Application, or NDA, and subsequently obtain, without further delays, and maintain regulatory approval of Zalviso in the United States and any related restrictions, limitations, and/or warnings in the label of Zalviso, if approved;

•

the outcome of any potential FDA Advisory Committee meeting held for Zalviso;

•

our ability to manufacture and supply Zalviso to Grünenthal GmbH, or Grünenthal, in accordance with their forecast and the Manufacture and Supply Agreement with Grünenthal;

•

the status of the Collaboration and License Agreement with Grünenthal or any other future potential collaborations, including potential milestones and royalty payments under the Grünenthal agreement and obligations under the Purchase and Sale Agreement with PDL BioPharma, Inc., or PDL;

our ability to obtain and maintain intellectual property protection for DSUVIA/DZUVEO and Zalviso.

In addition, you should refer to “Part II. Other Information - Item 1A. Risk Factors” in this Form 10-Q for a discussion of these and other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

June 30, 2019

(Unaudited)

December 31,
2018(1)

Assets

Current Assets:

Cash and cash equivalents

$

65,071

$

87,975

Short-term investments

26,475

17,740

Accounts receivable, net

221

49

Tax receivable

352

352

Inventories

2,844

854

Prepaid expenses and other current assets

1,855

1,024

Total current assets

96,818

107,994

Operating lease right-of-use assets

4,326

—

Property and equipment, net

12,598

11,483

Long-term tax receivable

351

351

Other assets

1,019

705

Total Assets

$

115,112

$

120,533

Liabilities and Stockholders’ (Deficit) Equity

Current Liabilities:

Accounts payable

$

2,334

$

2,070

Accrued liabilities

4,276

4,540

Long-term debt, current portion

—

8,611

Deferred revenue, current portion

324

315

Operating lease liabilities, current portion

759

—

Liability related to the sale of future royalties, current portion

592

392

Total current liabilities

8,285

15,928

Long-term debt, net of current portion

23,770

3,380

Deferred revenue, net of current portion

2,990

3,148

Operating lease liabilities, net of current portion

4,239

—

Liability related to the sale of future royalties, net of current portion

93,537

93,287

Other long-term liabilities

710

537

Total liabilities

133,531

116,280

Commitments and Contingencies

Stockholders’ (Deficit) Equity:

Common stock, $0.001 par value—200,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 78,914,170 and 78,757,930 shares issued and outstanding as of June 30, 2019 and December 31, 2018

79

78

Additional paid-in capital

352,454

349,194

Accumulated deficit

(370,952

)

(345,019

)

Total stockholders’ (deficit) equity

(18,419

)

4,253

Total Liabilities and Stockholders’ (Deficit) Equity

$

115,112

$

120,533

(1)

The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

See notes to condensed consolidated financial statements.

5

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Revenue:

Net product sales

$

55

$

—

$

102

$

—

Collaboration agreement

886

351

1,104

625

Contract and other

—

467

—

536

Total revenue

941

818

1,206

1,161

Operating costs and expenses:

Cost of goods sold

1,810

749

3,040

1,863

Research and development

1,163

3,278

2,540

6,791

Selling, general and administrative

11,329

3,944

21,305

7,929

Total operating costs and expenses

14,302

7,971

26,885

16,583

Loss from operations

(13,361

)

(7,153

)

(25,679

)

(15,422

)

Other income (expense):

Interest expense

(500

)

(586

)

(876

)

(1,229

)

Interest income and other income (expense), net

456

195

1,083

331

Non-cash interest income (expense) on liability related to future sale of royalties

996

(2,995

)

(611

)

(5,811

)

Total other income (expense)

952

(3,386

)

(404

)

(6,709

)

Net loss before income taxes

(12,409

)

(10,539

)

(26,083

)

(22,131

)

Provision for income taxes

(3

)

(2

)

(3

)

(2

)

Net loss

$

(12,412

)

$

(10,541

)

$

(26,086

)

$

(22,133

)

Comprehensive loss

$

(12,412

)

$

(10,541

)

$

(26,086

)

$

(22,133

)

Net loss per share of common stock, basic and diluted

$

(0.16

)

$

(0.20

)

$

(0.33

)

$

(0.43

)

Shares used in computing net loss per share of common stock, basic and diluted

78,902,470

51,841,550

78,845,944

51,388,762

See notes to condensed consolidated financial statements.

6

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share data)

Common Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Other
Comprehensive
Income (Loss)

Total
Stockholders’
Equity (Deficit)

Shares

Amount

Balance as of December 31, 2018

78,757,930

$

78

$

349,194

$

(345,019

)

$

—

$

4,253

Cumulative effect adjustment for adoption of ASU No. 2016-02

—

—

—

153

—

153

Stock-based compensation

—

—

1,107

—

—

1,107

Issuance of common stock upon exercise of stock options

13,583

—

31

—

—

31

Issuance of common stock upon ESPP purchase

85,135

1

238

—

—

239

Net loss

—

—

—

(13,674

)

—

(13,674

)

Balance as of March 31, 2019

78,856,648

$

79

$

350,570

$

(358,540

)

$

—

$

(7,891

)

Stock-based compensation

—

—

1,346

—

—

1,346

Issuance of common stock upon exercise of stock options

57,522

—

155

—

—

155

Issuance of warrants related to debt financing

—

—

383

—

—

383

Net loss

—

—

—

(12,412

)

—

(12,412

)

Balance as of June 30, 2019

78,914,170

$

79

$

352,454

$

(370,952

)

$

—

$

(18,419

)

Common Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Other
Comprehensive
Income (Loss)

Total
Stockholders’Equity (Deficit)

Shares

Amount

Balance as of December 31, 2017

50,899,154

$

51

$

261,310

$

(297,870

)

$

—

$

(36,509

)

Stock-based compensation

—

—

1,080

—

—

1,080

Issuance of common stock upon ESPP purchase

92,290

—

141

—

—

141

Net loss

—

—

—

(11,592

)

—

(11,592

)

Balance as of March 31, 2018

50,991,444

$

51

$

262,531

$

(309,462

)

$

—

$

(46,880

)

Stock-based compensation

—

—

1,048

—

—

1,048

Issuance of common stock in connection with equity financings

2,335,743

2

7,405

—

—

7,407

Net loss

—

—

—

(10,541

)

—

(10,541

)

Balance as of June 30, 2018

53,327,187

$

53

$

270,984

$

(320,003

)

$

—

$

(48,966

)

See notes to condensed consolidated financial statements.

7

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Six Months
Ended June 30,

2019

2018

Cash flows from operating activities:

Net loss

$

(26,086

)

$

(22,133

)

Adjustments to reconcile net loss to net cash used in operating activities:

Net proceeds from issuance of common stock in connection with equity financings

—

7,407

Net proceeds from issuance of common stock through equity plans

425

141

Net cash provided by financing activities

12,901

3,786

Net decrease in cash and cash equivalents

(22,904

)

(19,629

)

Cash and cash equivalents—Beginning of period

87,975

52,902

Cash and cash equivalents—End of period

$

65,071

$

33,273

See notes to condensed consolidated financial statements.

8

AcelRx Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except where otherwise noted)

1. Organization and Summary of Significant Accounting Policies

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA®(known as DZUVEO in Europe) and Zalviso®, areboth focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In geographies where AcelRx decides not to commercialize products by itself, including for DZUVEO in Europe, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although it has not yet entered into any such arrangement. The Company is currently evaluating the timing of the resubmission of the new drug application, or NDA, for Zalviso. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

DSUVIA/DZUVEO

DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018, is indicated for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration. The EC approved DZUVEO for marketing in Europe in June 2018.

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA will only be distributed to facilities certified in the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting will need to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA will not be available in retail pharmacies or for outpatient use. As part of the REMS program, the Company will monitor distribution and audit wholesalers’ data, evaluate proper usage within the healthcare settings and monitor for any diversion and abuse. Additionally, AcelRx will de-certify healthcare settings that are non-compliant with the REMS program.

Zalviso

Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission. The Company is currently evaluating the timing of the NDA resubmission for Zalviso.

9

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights to commercialize the Zalviso PCA system, or the Product, in the countries of the European Union, or EU, Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, (collectively, the Field). In September 2015, the EC approved the marketing authorization application, or MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal, entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso has been approved for sale in Europe, on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. The FDA approved DSUVIA in November 2018 and the Company began its commercial launch of DSUVIA in the first quarter of 2019. As a result, the Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRx Pharmaceuticals, Inc., and its consolidated subsidiary. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, ARPI LLC, which was formed in September 2015 for the sole purpose of facilitating the Royalty Monetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 8 “Liability Related to Sale of Future Royalties” for additional information.

Reclassifications

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the current year's presentation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the United States. Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The condensed consolidated balance sheet as of December 31, 2018, was derived from the Company’s audited financial statements as of December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

10

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventory includes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units produced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred. DSUVIA was approved by the FDA in November 2018. Prior to FDA approval, all manufacturing costs for DSUVIA were expensed to research and development. Upon FDA approval, manufacturing costs for DSUVIA manufactured for commercial sale have been capitalized.

The Company's policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The Company periodically evaluates the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or market approach as that used to value the inventory. Because the predetermined, contractual transfer prices the Company is receiving from Grünenthal are less than the direct costs of manufacturing, all Zalviso inventories are carried at net realizable value.

Leases

In February 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), to enhance the transparency and comparability of financial reporting related to leasing arrangements. The Company adopted the standard effective January 1, 2019.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. As a result, the Company no longer recognizes deferred rent on the balance sheet.

Revenue from Contracts with Customers

Beginning January 1, 2018, the Company has followed the provisions of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Net product sales revenue

Revenues from product sales are recognized when distributors obtain control of the Company’s product, which occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the product to certified medically supervised healthcare settings, such as hospitals, surgical centers, and emergency departments. In addition to distribution agreements with these customers, the Company enters into arrangements with group purchasing organizations, or GPOs, and/or privately-negotiated discounts with respect to the purchase of its products. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of discounts, returns and GPO discounts and administrative fees. Variable consideration is recorded at the time product sales are recognized resulting in a reduction in product revenue. Variable consideration is estimated using the most-likely amount method, which is the single-most likely outcome under a contract and is typically at the stated contractual rate. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:

●

Distributor Fees – The Company offers contractually determined discounts to its Customers. These discounts are paid no later than two months after the quarter in which product was shipped.

●

GPO Discounts - The Company offers discounts to GPO members. These discounts are taken when the GPO members purchase DSUVIA from the Company’s customers, who then charge the discount amount back to the Company.

11

●

GPO Administrative Fees - The Company pays administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPOs’ members.

●

Returns – The Company allows its Customers to return product for credit 12 months after its product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.

The Company believes its estimated allowance for product returns requires a high degree of judgment and is subject to change based on its experience and certain quantitative and qualitative factors. The Company believes its estimated allowances for distributor fees, GPO discounts and administrative fees do not require a high degree of judgment because the amounts are settled within a relatively short period of time.

Amounts accrued for product revenue allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate and to reflect actual experience. Product revenue-related liabilities are recorded in the Company’s condensed consolidated balance sheets as Accrued liabilities. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly. Changes in sales allowance estimates could materially affect the Company’s results of operations and financial position.

Collaboration agreement revenue

The Company generates revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, cost reimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee’s future product sales.

Contract and other revenue

The Company entered into award contracts with U.S. Department of Defense, or the DoD, to support the development of DSUVIA. These contracts provided for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements was recognized when the related qualified research expenses were incurred. The Company was entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements. The Company estimated this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses were dependent on direct labor and direct reimbursable expenses throughout the life of each contract. The DoD Contract period of performance ended on February 28, 2019.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The Company’s performance obligations include delivering product to its distributors, commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and product supply.

The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods or services.

Transaction Price

The Company has both fixed and variable consideration. Variable consideration for product revenue is described as Net product sales in the condensed consolidated statements of comprehensive loss. For collaboration agreements, non-refundable upfront fees and product supply selling prices are considered fixed, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point they are considered fixed. The Company allocates the total transaction price to each performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.

At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

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Allocation of Consideration

As part of the accounting for collaboration arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing services are calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs of product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities of technical and regulatory success. For all other performance obligations, the Company uses a cost- plus margin approach.

Timing of Recognition

Revenues from product sales are recognized when distributors obtain control of the Company’s products, which occurs at a point in time, upon delivery to such distributors. Significant management judgment is required to determine the level of effort required under collaboration arrangements and the period over which the Company expects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress at the inception of the arrangement and re-evaluates it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time when control of the product is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer, and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.

Cost of Goods Sold

Cost of goods sold for product revenue includes third party manufacturing costs, shipping costs, and indirect overhead costs associated with production and distribution which are allocated to the appropriate cost pool and recognized when revenue is recognized. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred.

Under the Amended Agreements with Grünenthal, the Company sells Zalviso to Grünenthal at predetermined, contractual transfer prices that are less than the direct costs of manufacturing and recognizes indirect costs as period costs where they are in excess of normal capacity and not realizable on a lower of cost or market basis. Cost of goods sold for Zalviso shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs, packaging and distribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production.

Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties

In September 2015, the Company sold certain royalty and milestone payment rights from the sales of Zalviso in the European Union by its commercial partner, Grünenthal, pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL for gross proceeds of $65.0 million, referred to as the Royalty Monetization. The Company continues to have significant continuing involvement in the Royalty Monetization primarily due to an obligation to supply Zalviso to Grünenthal. Under the relevant accounting guidance, because of the Company’s significant continuing involvement, the Royalty Monetization is accounted for as a liability that is being amortized using the effective interest method over the life of the arrangement. In order to determine the amortization of the liability, the Company is required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and payments made to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the capped amount), less the $61.2 million of net proceeds the Company received, are amortized as interest expense over the life of the liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense, or interest income, as estimates are updated related to the Royalty Monetization, accordingly.

There are a number of factors that could materially affect the amount and timing of royalty and milestone payments from Zalviso in Europe, most of which are not within the Company’s control. Such factors include, but are not limited to, the success of Grünenthal’s sales and promotion of Zalviso, changing standards of care, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmental health authority imposed restrictions on the use of Zalviso, significant changes in foreign exchange rates as the royalties remitted to ARPI LLC are made in U.S. dollars, and other events or circumstances that could result in reduced royalty payments from European sales of Zalviso, all of which may result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the Royalty Monetization. Conversely, if sales of Zalviso in Europe are more than expected, the non-cash royalty revenues and the non-cash interest expense recorded by the Company would be greater over the term of the Royalty Monetization. The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the interest rate. Because estimated sales forecasts and payments may vary over the life of the Royalty Monetization, the Company may be required to recognize interest income as the imputed interest rate is adjusted prospectively to reflect the revised effective interest rate over the term of the Royalty Monetization.

The Company records non-cash royalty revenues and non-cash interest income (expense), within its Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization.

When the expected payments under the Royalty Monetization are lower than the gross proceeds of $65.0 million received, the Company defers recognition of any probable contingent gain until the Royalty Monetization liability expires.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2018. Aside from the adoption of ASU No. 2016-02, Leases (Topic 842) described below under “Recently Adopted Accounting Standards” and explained more fully above in “Leases,”and in Note 7 “Leases” below, there have been no significant changes to the Company’s significant accounting policies during the three and six months ended June 30, 2019, from those previously disclosed in its 2018 Annual Report on Form 10-K.

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Recently Adopted Accounting Standards

On August 29, 2018, the Financial Accounting Standards Board, or FASB, issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40)”. The FASB’s new guidance aligns the requirements for capitalizing implementation costs in a Cloud Computing Arrangement, or CCA, service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license.

The amendments in ASU No. 2018-15 require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

ASU No. 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company early adopted ASU No. 2018-15 effective January 1, 2019 under the prospective method, which did not have a material effect on the Company’s results of operations, financial condition or cash flows.

In August 2018, the SEC published Release No. 33-10532, Disclosure Update and Simplification, or DUSTR, which adopted amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles, or GAAP, or changes in the information environment. While most of the DUSTR amendments eliminate outdated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a reconciliation of changes in stockholders’ equity (deficit) in the notes or as a separate statement for each period for which a statement of comprehensive income (loss) is required to be filed. The new interim reconciliation of changes in stockholders’ equity (deficit) is included herein as a separate statement.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. In January, July and December 2018, the FASB issued additional amendments to the new lease guidance relating to, transition, and clarification. The July 2018 amendment, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, provided an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The new standard establishes a right-of-use, or ROU, model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 became effective for the Company on January 1, 2019. The Company has implemented the standard using an optional transition method that allows the Company to initially apply the new leases standard as of the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. In connection with the adoption, the Company has elected to utilize the package of practical expedients, including: (1) not reassess the lease classification for any expired or existing leases, (2) not reassess the treatment of initial direct costs as they related to existing leases, and (3) not reassess whether expired or existing contracts are or contain leases. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. The election of the hindsight practical expedient resulted in the extension of the lease term for the Company’s embedded lease.

The adoption of the new leases standard resulted in the following adjustments to the consolidated balance sheet as of January 1, 2019 (in thousands):

The adoption of ASU No. 2016-02, the new leases standard, did not impact previously reported financial results because the impact to prior periods was reflected as a cumulative-effect adjustment to the accumulated deficit under the optional transition method.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses”, or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently assessing the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new standards to have a material impact on the Company’s financial position, results of operations and cash flows.

14

2. Investments and Fair Value Measurement

Investments

The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income. Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

As of June 30, 2019 and December 31, 2018, none of the available-for-sale securities held by the Company had material unrealized losses. There were no other-than-temporary impairments for these securities at June 30, 2019 or December 31, 2018. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income to earnings during the three and six months ended June 30, 2019 and June 30, 2018.

As of June 30, 2019 and December 31, 2018, the contractual maturity of all investments held was less than one year.

15

Fair Value Measurement

The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of June 30, 2019, the Company held, in addition to Level II assets, a contingent put option liability associated with the Loan and Security Agreement, or the Loan Agreement, with Oxford Finance LLC, or Oxford. Similarly, as of December 31, 2018, the Company held a contingent put option liability associated with the Amended and Restated Loan and Security Agreement, or the Amended Loan Agreement, or Prior Agreement, with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules. See Note 6 “Long-Term Debt” for further description. The Company’s estimate of fair value of each of the contingent put option liabilities was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option. Changes to the estimated fair value of these liabilities are recorded in interest income and other income, net in the condensed consolidated statements of comprehensive loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

As of June 30, 2019

Fair Value

Level I

Level II

Level III

Assets

Money market funds

$

286

$

286

$

—

$

—

Commercial paper

88,242

—

88,242

—

Total assets measured at fair value

$

88,528

$

286

$

88,242

$

—

Liabilities

Contingent put option liability

$

657

$

—

$

—

$

657

Total liabilities measured at fair value

$

657

$

—

$

—

$

657

As of December 31, 2018

Fair Value

Level I

Level II

Level III

Assets

Money market funds

$

1,436

$

1,436

$

—

$

—

U.S. government agency securities

11,678

—

11,678

—

Commercial paper

90,564

—

90,564

—

Total assets measured at fair value

$

103,678

$

1,436

$

102,242

$

—

Liabilities

Contingent put option liability

$

121

$

—

$

—

$

121

Total liabilities measured at fair value

$

121

$

—

$

—

$

121

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three and six months ended June 30, 2019 and June 30, 2018 (in thousands):

Change in fair value of contingent put option associated with the Prior Agreement

(98

)

(121

)

Fair value—end of period

$

657

$

657

16

Three Months
Ended
June 30,
2018

Six Months
Ended
June 30,
2018

Fair value—beginning of period

$

186

$

207

Change in fair value of contingent put option associated with the Prior Agreement

(20

)

(41

)

Fair value—end of period

$

166

$

166

3. Inventories

Inventories consist of raw materials, work in process and finished goods and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

Balance as of

June 30, 2019

December 31, 2018

Raw materials

$

1,422

$

694

Work-in-process

273

160

Finished goods

1,149

—

Total

$

2,844

$

854

4.Revenue

As described in Note 1 “Organization and Summary of Significant Accounting Policies,” the Company has entered into the Amended Agreements with Grünenthal related to Zalviso and began its commercial launch of DSUVIA in the first quarter of 2019. At June 30, 2019, approximately $3.3 million of deferred revenue is attributable to the discount on future manufacturing services, which the Company expects to be recognized through 2029. For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers.”

The following table presents changes in the Company’s contract liability for the six months ended June 30, 2019:

Balance at

Beginning

of the Period

Additions

Deductions

Balance at

the end

of the Period

(in thousands)

Contract liability:

Deferred revenue

$

3,463

$

131

$

(280

)

$

3,314

During the three and six months ended June 30, 2019, the Company recognized the following revenue (in thousands):

Three months ended

June 30, 2019

Six months ended

June 30, 2019

Amounts included in contract liabilities at the beginning of the period:

Performance obligations satisfied – Amended Agreements

$

79

$

158

New activities in the period from performance obligations satisfied:

Performance obligations satisfied – Amended Agreements

649

677

Total revenue from performance obligations satisfied

728

835

Royalty revenue

158

269

Net product sales

55

102

Total revenue

$

941

$

1,206

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5. Collaboration Agreement

As described in Note 1 “Organization and Summary of Significant Accounting Policies,” the Company has entered into the Amended Agreements with Grünenthal related to Zalviso.

Amended License Agreement

Under the Amended License Agreement, the Company is eligible to receive approximately $194.5 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). Grünenthal will also make tiered royalty and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, depending on the level of sales achieved, on net sales of Zalviso. A portion of the tiered royalty payment, exclusive of the supply and trademark fee payments, will be paid to PDL in connection with the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as the Company continues to supply the Product to Grünenthal. The Amended License Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party, upon the bankruptcy or insolvency of either party, or by Grünenthal for convenience.

Amended MSA

Under the terms of the Amended MSA, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third-party back-up manufacturer to manufacture the Product for Grünenthal’s commercial sale in the Territory.

Unless earlier terminated, the Amended MSA continues in effect until the later of the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination of the Amended License Agreement. The Amended MSA is subject to earlier termination in connection with certain termination events in the Amended License Agreement, in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.

For the three and six months ended June 30, 2019, the Company recognized $0.9 million and $1.1 million in revenue under the Amended Agreements, respectively. For the three and six months ended June 30, 2018, the Company recognized $0.3 million and $0.6 million in revenue under the Amended Agreements, respectively. As of June 30, 2019, the Company had current and noncurrent portions of the deferred revenue balance under the Amended Agreements of $0.3 million and $3.0 million, respectively. The deferred revenue balance consists primarily of the significant and incremental discount on manufacturing services, which is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which began in February 2016 and is estimated to continue through 2029.

6. Long-Term Debt

Prior Agreement with Hercules

The Prior Agreement with Hercules required equal monthly payments of principal and interest through the scheduled maturity date of March 1, 2020. In addition, the Prior Agreement required a final payment equal to 6.5% of the aggregate principal amount of $20.5 million in loans, or the End of Term Fee, owed upon full repayment of the loan. On May 30, 2019, the Company used approximately $8.9 million of the proceeds from the Loan Agreement with Oxford (described below) to repay its outstanding obligations under the Prior Agreement, including the outstanding principal plus accrued interest of $7.4 million, and the End of Term Fee of $1.3 million. We accounted for the termination of the Prior Agreement as a debt extinguishment and, accordingly, incurred a loss of approximately $0.2 million associated with the unamortized End of Term Fee.

Interest expense related to the Amended Loan Agreement with Hercules was $0.2 million, $0.1 million of which represented amortization of the debt discount, for the three months ended June 30, 2019, and $0.6 million, $0.2 million of which represented amortization of the debt discount, for the six months ended June 30, 2019. Interest expense related to the Amended Loan Agreement with Hercules was $0.6 million, $0.1 million of which represented amortization of the debt discount, for the three months ended June 30, 2018, and $1.2 million, $0.3 million of which represented amortization of the debt discount, for the six months ended June 30, 2018.

Loan Agreement with Oxford

On May 30, 2019, the Company entered into the Loan Agreement with Oxford as the Lender. Under the Loan Agreement, the Lender made a term loan to the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019. The Company used approximately $8.9 million of the proceeds from the Loan to repay its outstanding obligations under the Prior Agreement, as described above. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, the Company received $15.9 million in net proceeds.

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The interest rate is calculated at a rate equal to the sum of (a) the greater of (i) the 30-day U.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue and (ii) 2.50%, plus (b) 6.75%. Payments on the Loan are interest-only until July 1, 2020 followed by equal principal payments and monthly accrued interest payments through the scheduled maturity date of June 1, 2023. At the Company’s election, the interest-only period may be extended to July 1, 2021, if prior to June 30, 2020, the Company receives unrestricted net cash proceeds of at least $45.0 million from either (i) the issuance and sale of equity securities, or (ii) “up front” payments in connection with a joint venture, collaboration or other partnering transaction, both of which are on terms and conditions acceptable to the Lender. A final payment equal to 5% of the aggregate principal amount of the Loan, or EOT Fee, will be due at the earlier of the maturity date, acceleration of the Loan, or prepayment of the Loan. The Company’s obligations under the Loan Agreement are secured by a security interest in all the assets of the Company, other than the Company’s intellectual property which is subject to a negative pledge.

The Company may prepay the Loan at any time. If the Loan is paid prior to the maturity date, the Company will pay the Lender a prepayment charge, based on a percentage of the then outstanding principal balance, equal to 2% if the prepayment occurs before May 30, 2020, 1.5% if the prepayment occurs after May 30, 2020, but on or before May 30, 2021 or 1% if the prepayment occurs after May 30, 2021. Upon voluntary or mandatory prepayment, in addition to the prepayment charge, the Company is required to pay the EOT Fee, Lender’s expenses and all outstanding principal and accrued interest through the prepayment date.

The Loan Agreement includes customary representations and covenants that, subject to exceptions, will restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. The Loan Agreement requires that the Company always maintain unrestricted cash of not less than $5.0 million in accounts subject to control agreements in favor of Lender, tested monthly as of the last day of the month.

The Loan Agreement also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of the Lender’s security interest or in the value of the collateral, a material adverse change in business, operations or the prospect of repayment, events relating to bankruptcy or insolvency. The Loan also contains a cross default provision, under which if a third party (under any agreement) has the right to accelerate indebtedness greater than $250,000, the Loan would also be considered in default. In addition, the Loan defines events which negatively impact government approvals, judgements in excess of $500,000 and the delisting of the Company’s shares of common stock on the Nasdaq Global Market, or Nasdaq, as events of default. Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lender may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement. Acceleration would result in the payment of any applicable prepayment charges and application of the default interest rate to the outstanding balance until payment is made if full. The Company bifurcated a compound derivative liability related to a contingent interest feature and acceleration upon default provision (contingent put option) provided to the Lender. The bifurcated embedded derivative must be valued and separately accounted for in the Company’s financial statements. As of May 30, 2019 (the date of issuance) and June 30, 2019, the estimated fair value of the contingent put option liability was $0.7 million and $0.7 million, respectively, which was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate. The contingent put option liability is revalued at the end of each reporting period and any change in the fair value is recognized in interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss.

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. The Warrants have been classified within stockholders’ deficit and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis. For further discussion, see Note 9 “Warrants”.

Interest expense related to the Loan Agreement was $0.3 million, $0.1 million of which represented amortization of the debt discount, for the three and six months ended June 30, 2019.

19

7. Leases

Office Lease

The Company leases office and laboratory space for its corporate headquarters, located at 301 – 351 Galveston Drive, Redwood City, California. In June 2017, the Company renegotiated the Lease with its Landlord, or the New Lease. The New Lease is effective from February 1, 2018 through January 31, 2024 and contains a renewal option for a six-year extension after the current expiration date. The Company does not expect that the renewal option will be exercised and has therefore excluded the option from the calculation of the right of use asset and lease liability. The initial monthly rent is approximately $0.1 million with annual increases of 3% commencing on February 1st, and the first two months to be abated provided that the Company is not in default thereunder. The lease includes non-lease components (i.e. property management costs) that are paid separately from rent based on actual costs incurred and therefore were not included in the right-of-use asset and liability but are reflected as an expense in the period incurred. The New Lease provided for an initial tenant incentive allowance of approximately $0.4 million with an expiration of the unused portion in December 2019. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the remaining lease term.

On January 2, 2019, the Company entered into an agreement to sublease approximately 47% of its office and laboratory space effective February 16, 2019 and expiring on January 31, 2024, or the Sublease. The initial monthly rent from the sublessee is approximately $48,000 per month with annual increases of 3% commencing on February 1st, 2019. Under the Sublease agreement, the sublessee was granted early access to the facility on January 2, 2019, which is deemed the lease commencement date and rent was abated for 45 days until the effective date of the lease. The sublessee is obligated to pay its proportionate share of property management costs on a pass-through basis. The Company incurred a total of $0.4 million in initial direct costs in entering the sublease of which approximately $0.2 million is related to the tenant improvement allowance transferred to the sublessee. Initial direct costs are being amortized over the term of the sublease.

The transfer of the tenant improvement allowance to the sublessee resulted in a change in cash flows for the New Lease and was accounted for as a modification with changes in lease term and consideration. As a result, the Company remeasured the lease liability with the revised lease payments and recognized approximately $24,000 as a decrease to the lease liability, with a corresponding adjustment to the right-of-use asset.

Contract Manufacturing Lease

On December 12, 2012, the Company entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization. The initial term of the agreement was through December 31, 2017, which term automatically renews in two-year increments unless earlier terminated by either party by giving eighteen months’ notice. Commencing in 2013, the Company is required to make overhead fee payments each year of $0.2 million, prorated based on aggregate revenues. The Company has determined that this fee is an in-substance fixed lease payment as it represents the minimum annual payment under the contract. The Company concluded that this agreement contains an embedded lease as the clean rooms have been built specifically for production of the Company’s product and their use is effectively controlled by the Company as it has priority over the space during the term of the agreement. The Company accounts for the agreement as an operating lease and has evaluated the non-cancelable term to be through the binding commitment date of December 31, 2021.

The components of lease expense are presented in the following table (in thousands):

Three months endedJune 30,2019

Six months endedJune 30,2019

Operating lease costs

$

340

$

680

Sublease income

(150

)

(296

)

Net lease costs

$

190

$

384

20

Other information related to the operating leases is presented in the following table (in thousands, except years and percentages):

Three months endedJune 30,2019

Six months endedJune 30,2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows used for operating leases

$

308

$

613

Supplemental non-cash disclosures of lease activities

Transfer of tenant improvement allowance to sublease

$

—

$

242

Right-of-use assets obtained in exchange for new operating lease liabilities

$

—

$

4,730

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

June 30, 2019

Weighted-average remaining term – operating lease (in years)

4.39

Weighted-average discount rate – operating lease

11.72

%

Maturities of lease liabilities as of June 30, 2019 are presented in the following table (in thousands):

Year:

2019 (remaining six months)

$

670

2020

1,468

2021

1,505

2022

1,345

2023

1,386

Thereafter

116

Total future minimum lease payments

6,490

Less imputed interest

(1,492

)

Total

$

4,998

Reported as:

Operating lease liabilities

$

759

Operating lease liabilities, net of current portion

4,239

Total lease liability

$

4,998

Future minimum sublease payments as of June 30, 2019 are presented in the following table (in thousands):

Year:

2019 (remaining six months)

$

288

2020

593

2021

610

2022

629

2023

648

Thereafter

54

Total future minimum sublease payments

$

2,822

The rent receivable balance is reported in the balance sheet as follows (in thousands):

Reported as:

Prepaid expenses and other current assets

$

69

Other assets

394

Total rent receivable

$

463

21

8. Liability Related to Sale of Future Royalties

On September 18, 2015, the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of $65.0 million. Under the Royalty Monetization, PDL will receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5 million), up to a capped amount of $195.0 million over the life of the arrangement.

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s prior estimates or the timing of such payments is materially different than its prior estimates, the Company prospectively adjusts the amortization of the liability and the effective interest rate. From inception through December 31, 2018, the Company’s effective annual interest expense rate was approximately 13.0%. During the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty Monetization liability balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated expected payments are less than the $65.0 million in gross proceeds received. The Company currently estimates that future payments to PDL over the remaining life of the arrangement will be approximately $36 million, therefore, a contingent gain of approximately $29 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization arrangement, there are significant uncertainties surrounding the amount and timing of payments and the probability of realization of the estimated contingent gain.

The current change in estimate reduces the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The change in estimate resulted in a decrease of $2.7 million to the net loss and a decrease of $0.03 to the net loss per share of common stock, basic and diluted, for both the three and six months ended June 30, 2019. The effective interest income rate for the three months ended June 30, 2019 was approximately 4.2%. The effective interest expense rate for the six months ended June 30, 2019 was 1.4%. The effective interest expense rate was approximately 13.4% and 13.5% for the three and six months ended June 30, 2018, respectively.

The following table shows the activity within the liability account for the six months ended and the period from inception to June 30, 2019 (in thousands):

Six months ended
June 30, 2019

Period from
inception to
June 30, 2019

Liability related to sale of future royalties — beginning balance

$

93,679

$

—

Proceeds from sale of future royalties

—

61,184

Non-cash royalty revenue

(161

)

(538

)

Non-cash interest expense recognized

611

33,483

Liability related to sale of future royalties as of June 30, 2019

94,129

94,129

Less: current portion

(592

)

(592

)

Liability related to sale of future royalties — net of current portion

$

93,537

$

93,537

As royalties and milestones are remitted to PDL from the Company’s subsidiary, ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies,” the balance of the liability will be effectively repaid over the life of the agreement. The Company records non-cash royalty revenues and non-cash interest income (expense) within its condensed consolidated statements of comprehensive loss over the term of the Royalty Monetization.

22

9. Warrants

Loan Agreement Warrants

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. The Warrants may be exercised on a cashless basis. The Warrants are exercisable for a term beginning on the date of issuance and ending on the earlier to occur of ten years from the date of issuance or the consummation of certain acquisitions of the Company as set forth in the Warrants. The number of shares for which the Warrants are exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in the Warrants.

The Company estimated the fair value of these Warrants as of the issuance date to be $0.4 million, which was used in estimating the fair value of the debt instrument and was recorded as equity. The fair value of the Warrants was calculated using the Black-Scholes option-valuation model, and was based on the strike price of $2.83, the stock price at issuance of $2.66, the ten-year contractual term of the warrants, a risk-free interest rate of 2.22%, expected volatility of 80.22% and 0% expected dividend yield.

As of June 30, 2019, warrants to purchase 176,679 shares of common stock issued to the Lender and its affiliates had not been exercised and were still outstanding. These warrants expire in May 2029.

10. Stock-Based Compensation

The Company recorded total stock-based compensation expense for stock options, stock awards and the 2011 Employee Stock Purchase Plan, or ESPP, as follows (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Cost of goods sold

$

68

$

74

$

129

$

161

Research and development

233

377

457

809

Selling, general and administrative

1,045

597

1,867

1,158

Total

$

1,346

$

1,048

$

2,453

$

2,128

As of June 30, 2019, there were 1,895,351 shares available for grant, 12,773,640 options outstanding and 959,642 restricted stock units outstanding under the Company’s 2011 Equity Incentive Plan and 773,754 shares available for grant under the ESPP.

11. Stockholders’ Equity

Common Stock

ATM Agreement

On May 9, 2019, the Company increased the aggregate offering price of shares of the Company’s common stock which may be offered and sold under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent by $40.0 million. There were no sales of common stock under the ATM Agreement during the three and six months ended June 30, 2019. As of June 30, 2019, the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $46,564,331, which includes the amount that remained for sale under the ATM Agreement before the increase.

12. Net Loss per Share of Common Stock

The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

June 30,

2019

2018

RSUs, ESPP and stock options to purchase common stock

14,090,688

11,779,042

Common stock warrants

176,679

176,730

23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2018, or Annual Report.

About AcelRx Pharmaceuticals, Inc.

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA® (known as DZUVEO in Europe) and Zalviso are both focused on the treatment of acute pain, and each utilizes sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings.

DSUVIA®(sufentanil sublingual tablet, 30 mcg)

DSUVIA, known as DZUVEO in Europe, approved by the United States Food and Drug Administration, or FDA, in November 2018, is indicated for use in adults in certified medically supervised healthcare settings, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with intravenous, or IV, administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for IV and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration. The European Commission, or EC, approved DZUVEO for marketing in Europe in June 2018.

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA will only be distributed to facilities certified in the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting will need to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA will not be available in retail pharmacies or for outpatient use. As part of the REMS program, we will monitor distribution and audit wholesalers’ data, evaluate proper usage within the healthcare settings and monitor for any diversion and abuse. Additionally, we will de-certify healthcare settings that are non-compliant with the REMS program.

Examples of potential patient populations and settings in which DSUVIA could be used include: emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of office-based or hospital-based procedures; patients being treated and transported by paramedics; and for battlefield casualties. In the emergency room and in ambulatory care environments, patients often do not have immediate IV access available, or maintaining IV access may provide an impediment to rapid discharge. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate to satisfactory analgesia. Oral pills and liquids generally have slow and erratic onset of analgesia. Based on internal market research conducted to date, we believe that additional treatment options are needed that can safely and effectively treat acute trauma pain, in both civilian and military settings, and that can provide an alternative to currently marketed oral pills and liquids, as well as IV-administered opioids, for moderate-to-severe acute pain.

Zalviso® (sufentanil sublingual tablet system, 15 mcg)

While still under development in the United States, Zalviso is approved and marketed in the European Union, or EU. Zalviso is intended for the management of moderate-to-severe acute pain in hospitalized adult patients. Zalviso consists of a pre-filled cartridge of 40 sufentanil sublingual tablets, 15 mcg, delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system.

Zalviso is a pre-programmed non-invasive system that allows hospital patients with moderate-to-severe acute pain to self-dose with sufentanil sublingual tablets, 15 mcg, to manage their pain. Zalviso is designed to help address certain problems associated with post-operative IV patient-controlled analgesia, or PCA. Zalviso allows patients to self-administer sufentanil sublingual tablets via a pre-programmed, secure system designed in part to eliminate the risk of healthcare provider programming errors.

24

The Zalviso System consists of the following components: a disposable dispenser tip, a disposable dispenser cap, an adhesive thumb tag, a cartridge of 40 sufentanil sublingual 15 mcg tablets (approximately a two-day supply) in a disposable radio frequency identification and bar-coded cartridge, a reusable, rechargeable handheld controller, a tether, and an authorized access card.

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, or, as amended, the Amended License Agreement, which grants Grünenthal the European rights to commercialize Zalviso in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatment in medically supervised settings. Also on December 16, 2013, AcelRx and Grünenthal, entered into a related Manufacture and Supply Agreement, or the MSA, or as amended, the Amended MSA, under which AcelRx will exclusively manufacture and supply Zalviso to Grünenthal for commercial sales in the Territory. The Amended MSA, together with the Amended License Agreement, are referred to as the Amended Agreements. For additional information on the Amended Agreements, see Note 5 “Collaboration Agreement” in the accompanying notes to the condensed consolidated financial statements.

Zalviso was approved for commercial sale by the EC in September 2015 and our collaboration partner, Grünenthal, began its commercial launch of Zalviso in the EU in April 2016. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the sales of Zalviso in Europe by Grünenthal to PDL BioPharma, Inc., or PDL, which we refer to in this Quarterly Report as the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties” in the accompanying notes to the condensed consolidated financial statements. Royalty revenues and non-cash royalty revenues from the commercial sales of Zalviso in the EU are expected to be minimal for 2019.

We submitted a new drug application, or NDA, for Zalviso in September 2013, or the Zalviso NDA, and on July 25, 2014, the Division of Anesthesia, Analgesia, and Addiction Products of the FDA issued a Complete Response Letter, or CRL, for the Zalviso NDA. We are currently evaluating the timing of the resubmission of the Zalviso NDA.

Financial Overview

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, continue our research and development activities, and support Grünenthal’s European sales of Zalviso. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

We launched the commercialization of DSUVIA in the United States in the first quarter of 2019. As we continue developing as a commercial enterprise, we expect the business aspects of our company to become more complex. We plan to continue to add personnel and incur additional costs related to the maturation of our business and the commercialization of DSUVIA and potential commercialization of Zalviso in the United States, subject to FDA approval. In addition, in connection with the commercial launch of DSUVIA, we will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA. We expect to have qualified product being packaged using this new equipment beginning in 2020. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2020 and beyond.

To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the sales of Zalviso by Grünenthal, and funding from the Department of Defense, or DoD. The contract with the DoD was substantially completed in 2018.

Our revenues since inception have consisted primarily of revenues from our agreements with Grünenthal and our research contracts with the DoD. There can be no assurance that our relationship with Grünenthal will continue beyond the initial term of its agreements or that we will be able to meet the milestones specified in the agreements. Under the terms of the DoD contract, the DoD has reimbursed us for certain costs incurred for development, manufacturing, regulatory and clinical costs outlined in the DoD contract, including reimbursement for certain personnel and overhead expenses.

We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe. There can be no assurance that we will enter into a collaborative agreement for DZUVEO, or any other collaborative agreements, or receive research-related contract awards in the future. Accordingly, we expect revenues to continue to fluctuate from period-to-period. Although we have received approval of DSUVIA in the U.S., and Zalviso and DZUVEO in Europe, we cannot provide assurance that we will generate revenue from those products in excess of our operating expenses, nor that we will obtain marketing approval for Zalviso in the United States and subsequently generate revenue from Zalviso in excess of our operating expenses.

Our net loss for the three months and six months ended June 30, 2019 was $12.4 million and $26.1 million, respectively, compared to net losses of $10.5 million and $22.1 million for the three and six months ended June 30, 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $371.0 million. As of June 30, 2019, we had cash, cash equivalents and short-term investments totaling $91.5 million compared to $105.7 million as of December 31, 2018.

25

Critical Accounting Policies and Significant Judgments and Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies and estimates are detailed in our Annual Report.

There have been no significant changes to our critical accounting policies or significant judgements and estimates for the three and six months ended June 30, 2019, from those previously disclosed in our Annual Report aside from the adoption of ASU No. 2016-02, Leases (Topic 842) which is explained more fully in Note 1 “Organization and Summary of Significant Accounting Policies - Leases,”and in Note 7 “Leases” in the accompanying notes to the condensed consolidated financial statements and updates to our “Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties” policy which is explained more fully in Note 1 “Organization and Summary of Significant Accounting Policies.”

Results of Operations

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial launch of DSUVIA, our research and development efforts, and variations in the level of expenditures related to commercial launch and development efforts during any given period. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.

Three and Six Months Ended June 30, 2019 and 2018

Revenue

Net Product Sales Revenue

We began commercial sales of DSUVIA in the first quarter of 2019. Revenues from product sales are recognized when distributors obtain control of our product, which occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the products to certified medically supervised healthcare settings, such as hospitals, surgical centers, and emergency departments. In addition to distribution agreements with these customers, we enter into arrangements with group purchasing organizations, or GPOs, and privately-negotiated discounts with respect to the purchase of our products. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of discounts, returns, and GPO discounts and administrative fees. Variable consideration is recorded at the time product sales are recognized, resulting in a reduction in product revenue.

We believe our estimated allowance for product returns requires a high degree of judgment and is subject to change based on our experience and certain quantitative and qualitative factors. We believe our estimated allowances for distributor fees, GPO discounts and administrative fees do not require a high degree of judgment because the amounts are settled within a relatively short period of time. Amounts accrued for product revenue allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate and to reflect actual experience.

For the three and six months ended June 30, 2019, net product sales of DSUVIA were $55,000 and $102,000, respectively.

Collaboration Agreement Revenue

In September 2015, the EC granted marketing approval for Zalviso to our commercial partner, Grünenthal, and Grünenthal commercially launched Zalviso in Europe, with the first commercial sale occurring in April 2016. We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal.

26

For the three months ended June 30, 2019, we recognized $0.9 million in revenue under the Amended Agreements, $0.1 million of which was non-cash royalty revenue, with the remainder consisting primarily of product sales revenue. For the three months ended June 30, 2018, we recognized $0.3 million in revenue under the Amended Agreements, $0.1 million of which was non-cash royalty revenue, with the remainder consisting primarily of product sales revenue. Revenue recognized under the Amended Agreements for the six months ended June 30, 2019 was $1.1 million, $0.2 million of which was non-cash royalty revenue, with the remainder consisting primarily of product sales revenue, compared to $0.6 million for the six months ended June 30, 2018, consisting primarily of product sales revenue. The increase in collaboration agreement revenue for the three and six months ended June 30, 2019, as compared to the prior year period, was primarily the result of increased orders from Grünenthal. In 2019, we expect our collaboration agreement revenue related to product sales to continue to increase slightly as Grünenthal’s existing inventories decrease and face expiration such that their order quantities begin to increase modestly. In addition, under the Royalty Monetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. As a result, collaboration agreement revenue is not expected to have a significant impact on our cash flows in the near-term since a significant portion of our European Zalviso royalties and milestones were already monetized with PDL in 2015. We anticipate that royalty revenues and non-cash royalty revenues from European sales of Zalviso in 2019 will be minimal.

As of June 30, 2019, we had current and non-current portions of the deferred revenue balance under the Amended Agreements of $0.3 million and $3.0 million, respectively. The estimated margin we expect to receive on transfer prices under the Amended Agreements was deemed to be a significant and incremental discount on manufacturing services, as compared to market rates for contract manufacturing margin. The original value assigned to this portion of the total allocated consideration was $4.4 million. We anticipate that the deferred revenue balance will decline on a straight-line basis through 2029, as we recognize collaboration revenue under the Amended Agreements.

Contract and Other Revenue

For the three and six months ended June 30, 2019, we did not recognize any revenue under the DoD Contract for DSUVIA, while we recognized $0.4 million and $0.5 million, respectively, in DoD Contract revenue for the three and six months ended June 30, 2018. Under the terms of the DoD Contract, the DoD reimbursed us for costs incurred for development, manufacturing, regulatory and clinical costs as outlined in the DoD Contract, including reimbursement for certain personnel and overhead expenses. The DoD Contract period of performance ended on February 28, 2019.

Cost of goods sold

As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019. In October 2015, we initiated commercial production of Zalviso for Grünenthal. Under the Amended Agreements, we sell Zalviso to Grünenthal at a predetermined transfer price. We do not recover internal indirect costs as part of the transfer price. In addition, at current low volume levels, our direct costs are in excess of the transfer prices we are receiving from Grünenthal. Furthermore, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic changes. However, we continue to look for additional cost saving opportunities. For example, we are currently consolidating the production of some of the components of Zalviso which we expect will result in lower manufacturing costs. To date, we have not yet resubmitted the Zalviso NDA and sales by Grünenthal in Europe have not been substantial. If we do not timely resubmit the Zalviso NDA and then receive timely approval and are unable to successfully launch Zalviso in the U.S., or the volume of Grünenthal sales does not increase significantly, we will not achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin.

Total cost of goods sold for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

(In thousands, except percentages)

Cost of goods sold

$

1,810

$

749

$

1,061

142

%

$

3,040

$

1,863

$

1,177

63

%

Direct costs from contract manufacturers for DSUVIA and Zalviso in the three and six months ended June 30, 2019 totaled $0.5 million and $0.6 million, respectively. In the three and six months ended June 30, 2018, direct costs included in costs of goods sold for Zalviso totaled $0.1 million and $0.5 million, respectively. Direct cost of goods sold for DSUVIA and Zalviso delivered to Grünenthal includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs.

The indirect costs to manufacture DSUVIA and Zalviso in the three and six months ended June 30, 2019 totaled $1.3 million and $2.4 million, respectively. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses. Indirect costs included in costs of goods sold for Zalviso totaled $0.7 million and $1.4 million in the three and six months ended June 30, 2018, respectively. These indirect costs will represent a smaller percentage of revenue as our product sales increase. We periodically evaluate the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or market approach as that used to value the inventory. For the foreseeable future, we anticipate negative gross margins on Zalviso product delivered to Grünenthal.

27

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and development expenses included the following:

•

expenses incurred under agreements with contract research organizations and clinical trial sites;

•

employee-related expenses, which include salaries, benefits and stock-based compensation;

•

payments to third party pharmaceutical and engineering development contractors;

•

payments to third party manufacturers;

•

depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and equipment and laboratory and other supply costs; and

•

costs for equipment and laboratory and other supplies.

We expect to incur future research and development expenditures to support the FDA regulatory review of the Zalviso NDA, once it is resubmitted.

We track external development expenses on a program-by-program basis. Our development resources are shared among all of our programs. Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are considered research and development overhead.

Below is a summary of our research and development expenses during the three and six months ended June 30, 2019 and 2018 (in thousands, except percentages):

Three Months Ended June 30,

Six Months Ended June 30,

Drug Indication/Description

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

(In thousands, except percentages)

DSUVIA

$

130

$

869

$

(739

)

(85

)%

$

276

$

1,485

$

(1,209

)

(81

)%

Zalviso

158

105

53

50

%

339

502

(163

)

(32

)%

Overhead

875

2,304

(1,429

)

(62

)%

1,925

4,804

(2,879

)

(60

)%

Total research and development expenses

$

1,163

$

3,278

$

(2,115

)

(65

)%

$

2,540

$

6,791

$

(4,251

)

(63

)%

The $2.1 million decrease in research and development expenses for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, and the $4.3 million decrease for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, were primarily due to lower overhead-related research and development expenses as we shifted the majority of our research and development personnel to support our commercialization efforts following the FDA approval of DSUVIA. In addition, we have substantially completed our DSUVIA and Zalviso development programs resulting in decreased DSUVIA- and Zalviso-related spending in the first half of 2019 as compared to the first half of 2018.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services. We expect selling, general and administrative expenses in the fiscal year 2019 to increase as compared to fiscal year 2018 expenses, as we focus our efforts on the commercialization of DSUVIA in the United States.

28

Total selling, general and administrative expenses for the three and six months ended June 30, 2019 and 2018 were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

(In thousands, except percentages)

Selling, general and administrative expenses

$

11,329

$

3,944

$

7,385

187

%

$

21,305

$

7,929

$

13,376

169

%

Selling, general and administrative expenses for the three months ended June 30, 2019 increased by $7.4 million, as compared to the three months ended June 30, 2018 and increased by $13.4 million during the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. In both periods, the increases were primarily due to increased personnel-related expenses and programs in support of the commercial launch of DSUVIA. We have increased our headcount for selling, general and administrative efforts by 54 employees as compared to June 30, 2018.

Other Income (Expense)

Total other income (expense) for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands, except percentages):

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

2019

2018

$ Change

2019 vs. 2018

% Change

2019 vs. 2018

(In thousands, except percentages)

Interest expense

$

(500

)

$

(586

)

$

86

(15

) %

$

(876

)

$

(1,229

)

$

353

(29

) %

Interest income and other income (expense), net

456

195

261

134

%

1,083

331

752

227

%

Non-cash interest income (expense) on liability related to sale of future royalties

996

(2,995

)

3,991

(133

)%

(611

)

(5,811

)

5,200

(89

)%

Total other income (expense)

$

952

$

(3,386

)

$

4,338

(128

)%

$

(404

)

$

(6,709

)

$

6,305

(94

)%

Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. On May 30, 2019, we entered into a Loan and Security Agreement, or the Loan Agreement, with Oxford Finance LLC, or Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of $25.0 million. We used approximately $8.9 million of the proceeds from the Loan Agreement with Oxford to repay our outstanding obligations under the loan agreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., or the Prior Agreement, including the outstanding principal plus accrued interest of $7.4 million, and the End of Term Fee of $1.3 million. We accounted for the termination of the Prior Agreement as a debt extinguishment and, accordingly, incurred a loss of $0.2 million associated with the unamortized end of term fee. Interest expense decreased in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, primarily as a result of the principal payments made against the Prior Agreement subsequent to June 30, 2018. As of June 30, 2019, the accrued balance due under the Loan Agreement with Oxford was $23.8 million. Refer to Note 6 “Long-Term Debt” in the accompanying notes to the condensed consolidated financial statements for additional information.

Interest income and other income (expense), net, for the three and six months ended June 30, 2019 and 2018 primarily related to interest earned on our investments. The increase is due to a larger average investment balance during the three and six months ended June 30, 2019 as compared to the prior year periods.

The increase in non-cash interest income and decrease in non-cash interest expense on the liability related to the sale of future royalties for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018, is attributable to the Royalty Monetization that we completed in September 2015. As described in Note 8 “Liability Related to Sale of Future Royalties”, the Royalty Monetization has been recorded as debt under the applicable accounting guidance. During the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the debt balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The change in estimate was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The current change in estimate will result in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated payments under the Royalty Monetization are less than the $65.0 million in gross proceeds received. The effective interest income rate for the three months ended June 30, 2019 was approximately 4.2%, and the effective interest expense rate for the six months ended June 30, 2019 was approximately 1.4%. The effective interest expense rate for the three and six months ended June 30, 2018 was approximately 13.4% and 13.5%, respectively. We anticipate that we will record approximately $1 million in non-cash interest income related to the Royalty Monetization in the year ended December 31, 2019.

29

Liquidity and Capital Resources

Liquidity

We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses in 2019 and may incur significant losses and negative cash flows from operations in the future. We have funded our operations primarily through issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, and our contracts with the DoD.

As of June 30, 2019, we had cash, cash equivalents and investments totaling $91.5 million compared to $105.7 million as of December 31, 2018. The decrease was primarily due to cash required to fund our continuing operations, as we began our commercialization activities for DSUVIA and continued to support Grünenthal’s European sales of Zalviso, partially offset by cash received in connection with our debt refinancing. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of the third quarter of 2020. While we believe we have sufficient capital to meet our operational requirements through at least the end of the third quarter of 2020, our expectations may change depending on a number of factors including our expenditures related to the United States commercial launch of DSUVIA, any changes or delays in the resubmission of the Zalviso NDA and the FDA approval process for Zalviso. Our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations.

We have a Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. As of June 30, 2019, we had issued and sold an aggregate of 9.8 million shares of common stock pursuant to the ATM Agreement, for which we had received net proceeds of approximately $32.5 million, after deducting commissions, fees and expenses of $0.9 million. As of June 30, 2019, approximately $46.6 million of our common stock remained to be sold under the ATM Agreement.

On May 30, 2019, we entered into the Loan Agreement with Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of $25.0 million under a term loan and used approximately $8.9 million of the proceeds from the Loan to repay our outstanding obligations under the Prior Agreement. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, we received $15.9 million in net proceeds. As of June 30, 2019, the accrued balance under the Loan Agreement was $23.8 million. For more information, see Note 6 “Long-Term Debt” in the accompanying notes to the condensed consolidated financial statements.

The Royalty Monetization will be repaid to PDL over the life of the agreement through a portion of the European royalties and milestones received under the Amended License Agreement with Grünenthal. For more information, see Note 8 “Liability Related to the Sale of Future Royalties” in the accompanying notes to the condensed consolidated financial statements.

Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of commercial paper, money market funds and U.S. government sponsored enterprise debt securities. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity.

Cash Flows

The following is a summary of our cash flows for the periods indicated and has been derived from our condensed consolidated financial statements which are included elsewhere in this Form 10-Q (in thousands):

SixMonths Ended June 30,

2019

2018

Net cash used in operating activities

$

(25,559

)

$

(13,784

)

Net cash used in investing activities

(10,246

)

(9,631

)

Net cash provided by financing activities

12,901

3,786

Cash Flows from Operating Activities

The primary use of cash for our operating activities during these periods was to fund commercial readiness activities for our approved product, DSUVIA, and our product candidate, Zalviso, in addition to the support of Grünenthal’s European sales of Zalviso. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based compensation, non-cash interest income (expense) related to the sale of future royalties and interest expense related to our debt financings.

30

Cash used in operating activities of $25.6 million during the six months ended June 30, 2019, reflected a net loss of $26.1 million, partially offset by aggregate non-cash charges of $3.7 million. Non-cash charges included $2.5 million in stock-based compensation expense, $0.7 million in depreciation expense and $0.6 million in non-cash interest income on the liability related to the Royalty Monetization. The net change in our operating assets and liabilities of $3.2 million included a $2.0 million increase in inventories.

Cash used in operating activities of $13.8 million during the six months ended June 30, 2018, reflected a net loss of $22.1 million, partially offset by aggregate non-cash charges of $8.3 million. Non-cash charges included $5.8 million in non-cash interest expense on the liability related to the Royalty Monetization and $2.1 million for stock-based compensation expense. The net change in our operating assets and liabilities included a decrease in accounts receivable of $0.8 million and a decrease in accrued liabilities of $0.8 million.

Cash Flows from Investing Activities

Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments.

During the six months ended June 30, 2019, cash used in investing activities of $10.2 million was the net result of $28.2 million for purchases of investments and $1.8 million for purchases of property and equipment, offset by $19.7 million in proceeds from maturity of investments. During the six months ended June 30, 2018, cash used in investing activities of $9.6 million was the net result of $12.8 million for purchases of investments and $0.4 million for purchases of property and equipment, offset by $3.6 million in proceeds from maturity of investments.

Cash Flows from Financing Activities

Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings.

During the six months ended June 30, 2019, cash provided by financing activities was primarily due to $24.8 million in net proceeds received in connection with the Loan Agreement with Oxford, offset by $8.9 million for the repayment of the Prior Agreement, $3.5 million in payments of long-term debt under the Prior Agreement and $0.4 million in proceeds as a result of stock purchases made under our 2011 Employee Stock Purchase Plan, or ESPP, and stock option exercises. During the six months ended June 30, 2018, cash provided by financing activities was primarily due to net proceeds of $7.6 million from the issuance of common stock, including $7.4 million in net proceeds received under the ATM Agreement, offset by $3.8 million in payments of long-term debt.

Operating Capital and Capital Expenditure Requirements

Our rate of cash usage may increase in the future, in particular to support the commercialization of DSUVIA, resubmit the Zalviso NDA to the FDA, and support the anticipated FDA review of the resubmitted ZALVISO NDA. In the short-term, we anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of the third quarter of 2020. Our current operating plan includes anticipated activities required to resubmit the Zalviso NDA, to support the FDA review of the resubmitted Zalviso NDA, and expenditures related to the launch of DSUVIA in the United States. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to successfully launch DSUVIA and gain approval of Zalviso in the United States and intend to update our cash forecasts accordingly. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:

•

expenditures related to the launch of DSUVIA and potential commercialization of Zalviso;

•

future manufacturing, selling and marketing costs related to DSUVIA and Zalviso, including our contractual obligations to Grünenthal for Zalviso;

•

the outcome, timing and cost of the regulatory resubmission of Zalviso and any approval for Zalviso;

•

the initiation, progress, timing and completion of any post-approval clinical trials for DSUVIA, or Zalviso, if approved;

31

•

changes in the focus and direction of our business strategy and/or research and development programs;

•

milestone and royalty revenue we receive under our collaborative development and commercialization arrangements;

•

delays that may be caused by changing regulatory requirements;

•

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

•

the timing and terms of future in-licensing and out-licensing transactions;

•

the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;

•

the cost of procuring clinical and commercial supplies of DSUVIA and Zalviso;

•

the extent to which we acquire or invest in businesses, products or technologies; and

•

the expenses associated with any possible litigation.

In the long-term, our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds through the sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or from development and licensing arrangements to continue our development programs.

Through June 30, 2019, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the six months ended June 30, 2019, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

32

Part II. Other Information

Item 1. Legal Proceedings

From time to time we may be involved in legal proceedings arising in the ordinary course of business. We are not currently involved in any material legal proceedings. We may, however, be involved in material legal proceedings in the future. Such proceedings are subject to uncertainty and, if they happen, could have a material adverse effect on our business, results of operations, financial position or cash flows.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties. You should carefully consider the risks described below, together with all of the other information in this report. If any of the following risks actually materialize, our business, financial condition, results of operations, liquidity, and future prospects could be materially harmed and the price of our common stock could decline.

The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part II, Item 1A of our Quarterly Report for the quarterly period ended March 31, 2019.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2018.

Risks Related to Commercialization of DSUVIA® and Zalviso®

Our success is highly dependent on our ability to successfully commercialize DSUVIA. To the extent DSUVIA is not commercially successful, our business, financial condition and results of operations will be materially harmed.*

We invested a significant portion of our efforts and financial resources to develop and gain regulatory approval for DSUVIA and expect to continue making significant investments to commercialize DSUVIA. We believe our success is highly dependent on, and a significant portion of the value of our company relates to, our ability to successfully commercialize DSUVIA in the United States. The commercial success of DSUVIA depends heavily on numerous factors, including:

•

our ability to market, sell, and distribute DSUVIA;

•

our ability to establish and maintain commercial manufacturing with third parties;

•

acceptance of DSUVIA by physicians, patients and the healthcare community;

•

acceptance of pricing and placement of DSUVIA on payers’ formularies;

•

our ability to effectively compete with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

If we are unable to successfully commercialize DSUVIA, our business, financial condition, and results of operations will be materially harmed.

The commercial success of DSUVIA and Zalviso, if approved, in the United States, as well as DZUVEO and Zalviso in Europe, will depend upon the acceptance of these products by the medical community, including physicians, nurses, patients, and pharmacy and therapeutics committees.

The degree of market acceptance of DSUVIA and Zalviso, if approved, in the United States, or DZUVEO and Zalviso in Europe, will depend on a number of factors, including:

•

demonstration of clinical safety and efficacy compared to other products;

•

the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;

•

the use of DSUVIA for the management of moderate-to-severe acute pain by a healthcare professional for patient types that were not specifically studied in our Phase 3 trials;

33

•

the use of Zalviso for the management of moderate-to-severe acute pain in the hospital setting for patient types that were not specifically studied in our Phase 3 trials;

•

the prevalence and severity of any adverse events, or AEs, or serious adverse events, or SAEs;

•

overcoming any perceptions of sufentanil as a potentially unsafe drug due to its high potency opioid status;

•

limitations or warnings contained in the FDA-approved label for DSUVIA, or the European Medicines Agency, or EMA-approved label for DZUVEO, or Zalviso;

•

restrictions or limitations placed on DSUVIA due to the REMS program;

•

availability of alternative treatments;

•

existing capital investment by hospitals in IV PCA technology;

•

pricing and cost-effectiveness;

•

the effectiveness of our or any future collaborators’ sales and marketing strategies;

If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, we may not generate sufficient revenue and become or remain profitable.

If we are unable to maintain or grow oursales and marketing capabilities or enter into agreements with third parties to market and sell our products outside of the United States, we may be unable to generate sufficient product revenue.

In order to commercialize DSUVIA and Zalviso, if approved, in the United States, we must maintain or grow internal sales, marketing, distribution, managerial and other capabilities or make arrangements with third parties to perform these services. We have entered into agreements with third parties for the distribution of DSUVIA, and plan to enter into such agreements for, if approved, Zalviso, in the United States; however, if these third parties do not perform as expected or there are delays in establishing such relationships for, if approved, Zalviso, our ability to effectively distribute products would suffer.

We have entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and intend to enter into additional strategic partnerships with third parties to commercialize our products outside of the United States. DZUVEO was approved by the EC in June 2018. We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe, and there can be no assurance that we will successfully enter into such an agreement. We may also consider the option to enter into strategic partnerships for DSUVIA, or Zalviso, if approved, in the United States. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document.

We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our current or future collaboration partners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or DSUVIA/DZUVEO, or may otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our products to healthcare professionals and in geographical regions that will not be covered by our own marketing and sales force, or if our potential future collaboration partners do not successfully commercialize our products, our ability to generate revenues from product sales will be adversely affected.

If we are unable to maintain or grow adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate sufficient product revenue and become profitable. We compete with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

We have recently increased, and will continue to increase, the size of our organization. We may encounter difficulties with managing our growth, which could adversely affect our results of operations.*

As of June 30, 2019, we had approximately 90 full-time employees. Although we have substantially increased the size of our organization, we may need to add additional qualified personnel and resources to address our commercialization efforts for DSUVIA and potential commercialization of Zalviso in the United States, subject to FDA approval. Our current infrastructure may be inadequate to support our development and commercialization efforts and expected growth. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees, and may take time away from running other aspects of our business, including development and commercialization of DSUVIA and our product candidates.

34

Our future financial performance and our ability to successfully commercialize DSUVIA and our other product candidates that may receive regulatory approval will depend, in part, on our ability to manage any future growth effectively. In particular, as we continue to commercialize DSUVIA, we will need to support the training and ongoing activities of our sales force and will likely need to continue to expand the size of our employee base for managerial, operational, financial and other resources. To that end, we must be able to successfully:

We may not be able to accomplish these tasks or successfully manage our operations and, accordingly, may not achieve our research, development, and commercialization goals. Our failure to accomplish any of these goals could materially and adversely affect our business and operations.

Guidelines and recommendations published by government agencies, as well as non-governmental organizations, and existing laws and regulations can reduce the use of DSUVIA, and Zalviso, if approved in the United States.

Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may include DSUVIA and Zalviso, if approved in the United States. Recommendations of government agencies or non-governmental organizations may relate to such matters as maximum quantities dispensed to patients, dosage, route of administration, and use of concomitant therapies. Government agencies and non-governmental organizations have offered commentary and guidelines on the use of opioid-containing products. We are uncertain how these activities and guidelines may impact DSUVIA and our ability to gain marketing approval of Zalviso in the United States. Regulations or guidelines suggesting the reduced use of certain drug classes that may include DSUVIA or Zalviso, or the use of competitive or alternative products as the standard-of-care to be followed by patients and healthcare providers, could result in decreased use of DSUVIA or Zalviso, if approved, or negatively impact our ability to gain market acceptance and market share. The U.S. government and state legislatures have prioritized combatting the growing misuse and addiction to opioids and opioid overdose deaths and have enacted legislation and regulations as well as other measures intended to fight the opioid epidemic. Addressing opioid drug abuse is a priority for the current U.S. administration and the FDA and is part of a broader initiative led by the Department of Health and Human Services, or HHS. Overall, there is greater scrutiny of entities involved in the manufacture, sale and distribution of opioids. These initiatives, existing laws and regulations, and any negative publicity related to opioids may have a material impact on our business and our ability to manufacture opioid products.

Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties with respect to our commercialization of opioids could adversely affect our business, financial condition, results of operations and cash flows.

As a result of greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers by state and federal agencies. As a result of our manufacturing and commercial sale of DSUVIA in the United States and Zalviso in Europe, we could become the subject of federal, state and foreign government investigations and enforcement actions, focused on the misuse and abuse of opioid medications.

In addition, a significant number of lawsuits have been filed against opioid manufacturers, distributors, and others in the supply chain by cities, counties, state Attorney's General and private persons seeking to hold them accountable for opioid misuse and abuse. The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, or similar state laws, violations of state Controlled Substance Act or state False Claims Act, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment and other common law and statutory claims arising from defendants’ manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent abuse and diversion. While DSUVIA is designed for use solely in certified medically supervised healthcare settings and administered only by a healthcare professional in these settings, and is not distributed or available at retail pharmacies to patients by prescription, we can provide no assurance that parties will not file lawsuits of this type against us in the future. In addition, current public perceptions of the public health issue of opioid abuse may present challenges to favorable resolution of any potential claims. Accordingly, we cannot predict whether we may become subject to these kinds of investigations and lawsuits in the future, and if we were to be named as a defendant in such actions, we cannot predict the ultimate outcome. Any allegations against us may negatively affect our business in various ways, including through harm to our reputation.

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If we were required to defend ourselves in these matters, we would likely incur significant legal costs and could in the future be required to pay significant amounts as a result of fines, penalties, settlements or judgments. It is unlikely that our current product liability insurance would fully cover these potential liabilities, if at all. Moreover, we may be unable to maintain insurance in the future on acceptable terms or with adequate coverage against potential liabilities or other losses. For more information about our product liability insurance and exclusions therefrom, please see the risk factor entitled “We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability” elsewhere in this section. The resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Furthermore, in the current climate, stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are frequently in the media or advocated by public interest groups. Unfavorable publicity regarding the use or misuse of opioid drugs, the limitations of abuse-deterrent formulations, the ability of drug abusers to discover previously unknown ways to abuse opioid products, public inquiries and investigations into prescription drug abuse, litigation, or regulatory activity regarding sales, marketing, distribution or storage of opioids could have a material adverse effect on our reputation and impact on the results of litigation.

Finally, various government entities, including Congress, state legislatures or other policy-making bodies, or public interest groups have in the past and may in the future hold hearings, conduct investigations and/or issue reports calling attention to the opioid crisis, and may mention or criticize the perceived role of manufacturers, including us, in the opioid crisis. Similarly, press organizations have and likely will continue to report on these issues, and such reporting may result in adverse publicity for us, resulting in reputational harm.

A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our products, particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize our products successfully, if at all.

We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and distribution capabilities for our products. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty. For example:

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our partners may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical or regulatory results, manufacturing issues, a change in business strategy, a change of control or other reasons;

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our contracts for collaborative arrangements are or may be terminable at will on written notice and may otherwise expire or terminate, and we may not have alternatives available to achieve the potential for our products in those territories or markets;

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our partners may choose to pursue alternative technologies, including those of our competitors;

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we may have disputes with a partner that could lead to litigation or arbitration;

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we have limited control over the decisions of our partners, and they may change the priority of our programs in a manner that would result in termination of the agreement or add significant delays to the partnered program;

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our ability to generate future payments and royalties from our partners depends upon the abilities of our partners to establish the safety and efficacy of our drugs, maintain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of our products;

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we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability;

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our partners may not devote sufficient capital or resources towards our products; and

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our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products.

If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical development, manufacturing or commercialization efforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that would otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully and timely transition terminated collaborative agreements, we may have to undertake development and commercialization activities at our own expense or find alternative sources of capital.

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Approval of Zalviso and DZUVEO in Europe has resultedin a variety of risks associated with international operations that could materially adversely affect our business.*

Our existing collaboration with Grünenthal for Zalviso requires us to supply product to support the European commercialization of Zalviso. In addition, with the June 2018 approval of DZUVEO in Europe, we intend to enter into agreements with third parties to market DZUVEO in Europe, which may also require us to supply product to those third parties. We may be subject to additional risks related to entering into international business relationships, including:

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multiple, conflicting, and changing laws and regulations such as privacy and data regulations, transparency regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, including for drug approvals, and other governmental approvals, permits, and licenses;

economic weakness, including inflation, or political instability in particular foreign economies and markets;

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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

Any of these factors could have a material adverse effect on our business.

If we, or current and potential partners, are unable to compete effectively, our products may not reach their commercial potential.*

The U.S. biotechnology and pharmaceutical industries are characterized by intense competition and cost pressure. DSUVIA competes, and Zalviso, if approved in the U.S., will compete, with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. In particular, DSUVIA may compete with a wide variety of products and product candidates including (i) injectable opioid products, such as morphine, fentanyl, hydromorphone and meperidine; (ii) oral opioids such as oxycodone and hydrocodone; (iii) generic injectable local anesthetics, such as bupivacaine or branded formulations thereof; (iv) non-steroidal anti-inflammatory drugs, or NSAIDS, including ketorolac in intranasal or generic IV form, and IV meloxicam; and (v) transmucosal fentanyl products. Zalviso, if approved in the U.S., may compete with a number of opioid-based treatment options, including IV PCA pumps, oral PCA devices, and transdermal opioid PCAs.

Key competitive factors affecting the commercial success of our approved products are likely to be efficacy, safety profile, reliability, convenience of dosing, price and reimbursement. Many of our competitors and potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of products, and the commercialization of those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop and manufacture, or be more effectively marketed and sold than any product we may seek to commercialize. This may render our products obsolete or non-competitive. We anticipate that we will face intense and increasing competition as new drugs enter the market, additional technologies become available, and competitors establish collaborative or licensing relationships, which may adversely affect our competitive position. These and other competitive risks may materially adversely affect our ability to attain or sustain profitable operations.

Hospital or other health care facility formulary approvalsfor DSUVIA or Zalviso, if approved, in the United States may not be achieved, or could be subject to certain restrictions, which could make it difficult for us to sell our products.*

Obtaining formulary approvals can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approvals to allow us to sell our products into our target markets. Failure to obtain timely formulary approval will limit our commercial success. If we are successful in obtaining formulary approvals, we may need to complete evaluation programs whereby DSUVIA, or Zalviso, if approved, is used on a limited basis for certain patient types. The evaluation period may last several months and there can be no assurance that use during the evaluation period will lead to formulary approvals of DSUVIA, or Zalviso, if approved. Further, even successful formulary approvals may be subject to certain restrictions based on patient type or hospital protocol. Failure to obtain timely formulary approvals for DSUVIA, or Zalviso, if approved, would materially adversely affect our ability to attain or sustain profitable operations.

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Coverage and adequate reimbursement may not be available for DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe, which could make it difficult for us, or our partners, to sell our products profitably.*

Our ability to commercialize DSUVIA or Zalviso, if approved, in the United States, any future collaboration partner’s ability to commercialize DZUVEO in Europe, or Grünenthal’s ability to expand sales of Zalviso in Europe successfully will depend, in part, on the extent to which coverage and adequate reimbursement will be available from government payer programs at the federal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party payers.

No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the United States or Europe. Therefore, coverage and reimbursement can differ significantly from payer to payer. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage and adequate reimbursement rates from third party payers could significantly harm our operating results, our ability to raise capital needed to commercialize our approved drugs and our overall financial condition.

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell our products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of numerous generic pain medications may also substantially reduce the likelihood of reimbursement for DSUVIA or Zalviso, if approved, in the United States, and DSUVIA/DZUVEO and Zalviso in Europe and elsewhere. The application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. We expect to experience pricing pressures in connection with our sales of DSUVIA and Zalviso, if approved, in the United States, Grünenthal’s European sales of Zalviso, and future product sales of DZUVEO, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

Furthermore, market acceptance and sales of our products will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payers, such as private health insurers, hospitals and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe. Also, reimbursement amounts may reduce the demand for, or the price of, our products. For example, we anticipate we may need comparator studies of DZUVEO in Europe to ensure premium reimbursement in certain countries. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe.

Additionally, the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues able to be generated from the sale of the product in that country. For example, separate pricing and reimbursement approvals may impact Grünenthal’s ability to market and successfully commercialize Zalviso in its territory which includes the 28 EU member states as well as Norway, Iceland and Liechtenstein. Adverse pricing limitations may hinder our ability to recoup our investment in DSUVIA in the United States, or Zalviso, even after obtaining FDA marketing approval.

In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains additional drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump Administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. HHS has begun soliciting feedback on some of these measures and, at the same time, has implemented others under its existing authority. For example, in September 2018, Centers for Medicare & Medicaid Services, or CMS, announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019. Although these, and other measures will require additional authorization to become effective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Furthermore, even after initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing systems and publication of discounts by third party payers or authorities in other countries. In Europe, prices can be reduced further by parallel distribution and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur, revenue from sales of Zalviso and DZUVEO in Europe would be negatively affected.

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The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.*

If we are found to have improperly promoted off-label uses of our products, including DSUVIA or Zalviso, if approved, in the United States, we may become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. While we have received marketing approval for DSUVIA for our proposed indication, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties and a requirement for corrective advertising, including Dear Doctor letters. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. The FDA or other enforcement authorities could also request that we enter into a consent decree or a corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of DSUVIA or Zalviso, if approved, in the United States, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

If we are unable to establish and maintain relationships with group purchasing organizations any future revenues or future profitability could be jeopardized.

Many end-users of pharmaceutical products have relationships with group purchasing organizations, or GPOs, whereby such GPOs provide such end-users access to a broad range of pharmaceutical products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influence over the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their purchasing needs. We expect to derive revenue from end-user customers that are members of GPOs, for DSUVIA and Zalviso, if approved. Establishing and maintaining strong relationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations. The GPOs with whom we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from these products or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain our GPO relationships, sales of DSUVIA and Zalviso, if approved, and related revenues could be negatively impacted.

We intend to rely on a limited number of pharmaceutical wholesalers to distribute DSUVIAand Zalviso, if approved, in the United States.

We intend to rely primarily upon pharmaceutical wholesalers in connection with the distribution of DSUVIA and Zalviso, if approved, in the United States. As part of the DSUVIA REMS program, we will monitor distribution and audit wholesalers’ data. If our wholesalers do not comply with the DSUVIA REMS requirements, or if we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, or if our wholesalers are unable to distribute our drugs for regulatory, compliance or any other reason, it could have a material adverse effect on our sales and may prevent us from achieving profitability.

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Risks Related to Clinical Development and Regulatory Approval

Existing and future legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may obtain.*

In the United States and some foreign jurisdictions, the legislative landscape continues to evolve, including changes to the regulation of opioid-containing products. There have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay marketing approval of Zalviso outside of Europe. These changes will restrict or regulate post-approval activities for DSUVIA, DZUVEO and Zalviso, and affect our ability to profitably sell any products for which we obtain marketing approval. For example, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of this plan, the FDA announced that it intended to review product and labelling decisions and re-examine the risk-benefit paradigm for opioids. In June 2019, the FDA issued draft guidance related to a new benefit/risk framework for new opioid analgesic products, which proposes that the new product candidate show some benefit over an existing product. The potential impact of this on the Zalviso resubmission is unclear; however, the Zalviso clinical program does include a comparative safety and efficacy study versus IV PCA morphine.

In the European Union, or EU, the pricing of prescription drugs is subject to government control. In addition, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.

In the United States, the Affordable Care Act (as defined below) was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health policy reforms. Aspects of the Affordable Care Act that may impact our business include:

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extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance; and

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a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

The Affordable Care Act has the potential to substantially change health care financing and delivery by both governmental and private insurers and may also increase our regulatory burdens and operating costs.

Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain fees mandated by the Affordable Care Act, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. In July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA qualified health plans and health insurance issuers under the PPACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trump Administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the PPACA. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to successfully commercialize our products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory compliance, our products may lose regulatory approval and we may not achieve or sustain profitability, which would adversely affect our business.

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In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate reductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2027 unless Congressional action is taken. The American Tax Payer Relief Act further reduced Medicare payments to several providers, including hospitals.

Moreover, the Drug Supply Chain Security Act of 2013 imposes additional obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements of this legislation, manufacturers are required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.

Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be.

We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negatively impact our business. The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we have obtained or may obtain regulatory approval, our ability to set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenues and achieve or maintain profitability, and the level of taxes that we are required to pay.

We may experience market resistance, delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy regarding opioids generally, and sufentanil specifically.*

In February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of this plan, the FDA announced that it intended to review product and labelling decisions and re-examine the risk-benefit paradigm for opioids. In June 2019, the FDA issued draft guidance related to a new benefit/risk framework for new opioid analgesic products, which proposes that the new product candidate show some benefit over an existing product. The potential impact of this on the Zalviso resubmission is unclear; however, the Zalviso clinical program does include a comparative safety and efficacy study versus IV PCA morphine.

In May 2017, an Opioid Policy Steering Committee was established to address and advise regulators on opioid use. The Committee was charged with three initial questions: (i) should the FDA require mandatory education for healthcare professionals, or HCPs, who prescribe opioids; (ii) should the FDA take steps to ensure the number of prescribed opioid doses is more closely tailored to the medical indication; and (iii) is the FDA properly considering the risk of abuse and misuse of opioids during its drug review process. Zalviso has not been designed with an abuse-deterrent formulation and is not tamper-resistant. As a result, Zalviso has not undergone testing for tamper-resistance or abuse deterrence.

The FDA can delay, limit or deny marketing approval for many reasons, including:

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a product candidate may not be considered safe or effective;

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the manufacturing processes or facilities we have selected may not meet the applicable requirements; and,

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changes in their approval policies or adoption of new regulations may require additional work on our part.

Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidate, Zalviso, as a result of such inspections. In June 2014, the FDA completed an inspection at our corporate offices. We received a single observation on a Form 483 as a result of the inspection. Although we believe we have adequately addressed this observation in revised standard operating procedures, we, our contract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to obtain FDA approval for Zalviso and, if approved, our ability to launch and successfully commercialize Zalviso in the United States. In addition, results of FDA inspections could impact our ability to maintain FDA approval of DSUVIA, and our ability to expand and sustain commercial sales of DSUVIA in the United States.

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Any delay in, or failure to receive or maintain, approval for Zalviso in the United States could prevent us from generating meaningful revenues or achieving profitability. Zalviso may not be approved even if we believe it has achieved its endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. Zalviso is being regulated as a drug product under the NDA process administered by the FDA. The FDA could in the future require additional regulation of Zalviso, or DSUVIA, under the medical device provisions of the Federal Food, Drug and Cosmetic Act, or FDCA. We must comply with the Quality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, and other applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing trials. For example, DSUVIA is subject to a deferred post-marketing requirement for study in the pediatric population ages 6-17 years. Our protocol for this trial is not due until August 2020. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, we intend to resubmit our NDA seeking approval of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

The success of Zalviso relies, in part, on obtaining regulatory approval in the United States.

The success of Zalviso, in part, relies upon our ability to develop and receive regulatory approval of this product candidate in the United States for the management of moderate-to-severe acute pain in adult patients in the hospital setting. Our Phase 3 program for Zalviso initially consisted of three Phase 3 clinical trials. We reported positive top-line data from each of these trials and submitted an NDA for Zalviso to the FDA in September 2013, which the FDA then accepted for filing in December 2013. In July 2014, the FDA issued a Complete Response Letter, or CRL, for our NDA for Zalviso, or the Zalviso CRL. The Zalviso CRL contained requests for additional information on the Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of device errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. Furthermore, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial was needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on the results of a meeting with the FDA in September 2015, we completed the protocol review with the FDA and initiated this study, IAP312, in September 2016.

IAP312 was a Phase 3 study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. The IAP312 study was designed to rule out a 5% device failure rate. The study design required a minimum of 315 patients. In the IAP312 study, sites proactively looked for tablets that were dispensed by the patient but failed to be placed under the tongue, known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. Correspondence from the FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate. The IAP312 study evaluated all incidents of misplaced tablets; however, per the protocol, the error rate calculation does not include the rate of inadvertent dispensing. If the FDA includes the rate of inadvertent dispensing along with the device failures to calculate a total error rate, the resulting error rate may be unacceptable to the FDA. Further, the correspondence from the FDA suggests that we may need to modify the REMS program for Zalviso to address dropped tablets. We intend to submit the IAP312 study results as part of our resubmission of the NDA for Zalviso. We are currently evaluating the timing of the resubmission of our NDA for Zalviso.

There is no guarantee that the additional work we performed related to Zalviso, including the IAP312 trial, will result in our successfully obtaining FDA approval of Zalviso in a timely fashion, if at all. For example, the FDA may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate and the resulting error rate may be unacceptable to the FDA, or the FDA may still have concerns regarding the performance of the device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, the FDA could require us to complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDA resubmission or approval of the NDA and could require us to obtain significant additional funding. There is no guarantee such funding would be available to us on favorable terms, if at all. We intend to resubmit the Zalviso NDA seeking a label indication for the management of moderate-to-severe acute pain in adult patients in the hospital setting. However, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

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Upon resubmission of the Zalviso NDA, the FDA may hold an advisory committee meeting to obtain committee input on the safety and efficacy of Zalviso. Typically, advisory committees will provide responses to specific questions asked by the FDA, including the committee’s view on the approvability of the drug under review. Advisory committee decisions are not binding, but an adverse decision at the advisory committee may have a negative impact on the regulatory review of Zalviso. Additionally, we may choose to engage in the dispute resolution process with the FDA.

Our proposed trade name of Zalviso has been approved by the EMA and is currently being used in Europe. It has also been conditionally approved by the FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish with the name Zalviso prior to commercialization may be worthless.

Any delay in approval by the FDA of the Zalviso NDA, once it is resubmitted, may negatively impact our stock price and harm our business operations. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso, which would have a material adverse effect on our business.

We have not yet resubmitted the Zalviso NDA. Activities that we have undertaken to address issues raised in the Zalviso CRL may be deemed insufficient by the FDA.

We completed bench testing and additional Human Factors studies that we believed addressed certain items contained in the Zalviso CRL. However, before the results from these studies were submitted as a part of the proposed NDA resubmission, the FDA, in March 2015, notified us of the need for a clinical trial prior to the resubmission of the Zalviso NDA. In early September 2015, we had a Type C meeting with the FDA to discuss the FDA’s request for an additional clinical trial and our planned response to the Zalviso CRL. In response to discussions with the FDA, we agreed to complete an additional open-label study with Zalviso in post-operative patients, known as IAP312. We completed the protocol review for IAP312 and announced positive results from this study in August 2017, which we intend to use to support our NDA resubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso.

Although we believe the IAP312 study met safety, satisfaction and device usability expectations, there is no guarantee the IAP312 trial results will address the issues raised by the FDA. While we designed the protocols for bench testing and the Human Factors studies to address the issues raised in the Zalviso CRL and designed the protocol for the additional Zalviso clinical trial to further address these issues, there is no guarantee the FDA will deem such protocols and results sufficient to address those issues when they are formally reviewed as a part of an NDA resubmission. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achieving profitability. If any of these events occur, we may be forced to delay or abandon our development and commercialization efforts for Zalviso in the United States, which would have a material adverse effect on our business.

Lastly, while we believe the results from our bench testing, Human Factors studies and the IAP312 clinical trial are positive, the FDA may hold a different opinion and deem the results insufficient. The FDA may provide review commentary at any time during the resubmission and review process that could adversely affect or even prevent the approval of Zalviso, which would adversely affect our business. We may not be able to identify appropriate remediations to issues that the FDA may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issues raised by the FDA.

Positive clinical results obtained to date for Zalviso may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained from future clinical trials.

We have reported positive top-line data from each of our four Zalviso Phase 3 clinical trials completed to date, as well as our Phase 2 clinical trials for Zalviso. However, even if we believe that the data obtained from clinical trials is positive, the FDA has, and in the future could, determine that the data from our trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a clinical trial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of the results. For example, although we had achieved the primary endpoints in each of our three Phase 3 clinical trials for Zalviso which were included in our NDA filed in 2013, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial would be needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. While we believe Zalviso met safety, satisfaction and device usability expectations in this trial, known as IAP312, there is no guarantee the FDA will agree with our interpretation of these results. If the FDA were to require any additional clinical trials for Zalviso, our development efforts would be further delayed, which would have a material adverse effect on our business. Any such determination by the FDA would delay the timing of our commercialization plan for Zalviso and adversely affect our business operations.

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Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.

We have experienced and may in the future experience delays in clinical trials of our product candidates. While we have completed four Phase 3 clinical trials and several Phase 2 clinical trials for Zalviso, future clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. For example, we postponed the start of IAP312, originally planned for the first quarter of 2016, to September 2016. The postponement was due to a delay in the receipt and testing of final clinical supplies for this trial. As a result, the development timeline for Zalviso was further extended.

Our post-approval clinical trials for DSUVIA, or any future FDA-required clinical trials for Zalviso, could be delayed for a variety of reasons, including: